AbbVie Inc. (ABBV) Earnings Call Transcript

Good afternoon, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be introducing AbbVie today. From the company, we have a presentation from Rick Gonzalez, AbbVie's Chairman and CEO. And after the presentation, we're going to have a Q&A session with a broader swath of the management team, including Rob Michael, President of AbbVie; Chief Commercial Officer, Jeff Stewart; and Chief Medical Officer, Roopal Thakkar. So with that, I'm going to turn it over to Rick. Happy New Year, and thanks for joining us today.

All right. Thanks, Chris.

Thank you.

Well, thank you, Chris, and good afternoon, everyone. It's certainly a pleasure to be here with all of you. Before I begin, please take a moment to review the forward-looking statement. I know it's the most enjoyable thing that you have here for a couple of minutes before we move forward. This is certainly an exciting time when we think about our company. We're just finishing up our 10th year operating as an independent company. AbbVie has grown over the past decade to become a leading pharmaceutical company with a market capitalization of $285 billion and a track record of consistently delivering top-tier financial performance and strong execution. We've also become a company that has evolved over time to have very strong operating characteristics. We have a diversified portfolio with significant leadership positions in several major therapeutic categories, supported by industry-leading commercial capabilities and execution. We have an R&D engine that has discovered and developed 5 major blockbusters over the past decade. These assets are expected to generate approximately $16 billion in annual revenues in 2022, and we have a robust pipeline across all stages of development. We have also strategically acquired and successfully integrated several differentiated assets to further support AbbVie's long-term growth. These efforts have resulted in an outstanding total shareholder return of more than 600% since our inception. We certainly created a very strong foundation as we enter 2023. The event that we have all been long planning for here at AbbVie, the U.S. HUMIRA loss of exclusivity, which will begin later this month, will have an impact on AbbVie's total performance in the near term. We've now secured HUMIRA formulary access for more than 90% of the U.S. covered lives this year. When we issued formal 2023 guidance, our fourth -- on the fourth quarter call, it's important to note that the lower end of our EPS outlook range will represent floor earnings for the company. Regardless of the shape of the erosion curve over the next 2 years, we do not anticipate that 2024 earnings will be lower than the initial 2023 EPS guidance given that the momentum and growth from another year of our broader portfolio is expected to more than offset any potential incremental HUMIRA erosion that could occur in 2024. Ultimately, though, we remain well positioned to absorb the impact from the HUMIRA LOE and quickly return to strong growth starting in 2025. We continue to anticipate a clear path to strong sales growth in 2025 with high single-digit compounded annual growth rate to the end of this decade. With our robust long-term growth outlook, AbbVie clearly represents a unique investment opportunity, well positioned for attractive shareholder returns. Following the U.S. HUMIRA event, we expect AbbVie's revenue growth to be among the highest in our industry. We will also have one of the lowest LOE exposures through the end of this decade, and expect our strong business performance will generate substantial cash flow to support our capital allocation needs. This includes investing in innovative R&D across our therapeutic categories as well as the capacity to continue to do business development to augment our pipeline and our portfolio. Growing our dividend, this remains a key priority and reflects an attractive yield for our shareholders. Last October, we announced a 5% increase in our cash quarterly dividend, which we have now grown by 270% since our inception. And this further underscores our level of confidence in AbbVie's long-term outlook. And finally, paying down debt. We have made substantial progress and remain on track to achieve roughly $34 billion of cumulative paydown through 2023. Now moving to Slide 5. Our long-term growth will be driven by numerous differentiated assets across each of our core areas. Let's start with immunology. In Immunology, our performance and execution has been outstanding, and we're well positioned for sustained leadership. SKYRIZI and RINVOQ are now commercialized across all of HUMIRA's major indications, plus a distinct new indication, atopic dermatitis. These 2 new therapies are demonstrating impressive results with more than $7.5 billion of combined sales expected in 2022. We also have several promising R&D programs underway in our core disease areas within immunology and in areas of immunology, where there are a few or no effective treatments. Areas like lupus, GCA, HS, alopecia, vitiligo and PMR. Turning now to Slide 6. The rapid indication expansion of SKYRIZI and RINVOQ took place in less than half of HUMIRA's development time line. With the addition of atopic dermatitis, these 2 assets together now span a greater portion of the global immunology market than HUMIRA did. And we expect they will remain major growth drivers for the company through the end of this decade and beyond. Based on the strong launch trajectory across the currently approved indications, as well as the progress that we're making with additional label expansion. SKYRIZI and RINVOQ are now on pace to deliver more than $17.5 billion in combined sales, risk-adjusted sales in 2025, well above our previous expectations. We now expect global sales for to reach more than $10 billion in 2025, an increase of $2.5 billion versus our previous guidance, reflecting higher performance across basically all of the indications. We continue to expect RINVOQ to achieve more than $7.5 billion of global sales in 2025. This outlook now contemplates higher sales in IBD based on the strong approved label for UC and the robust data demonstrated in our clinical program for Crohn's disease. This increased momentum in IBD is expected to be offset by lower contributions in rheumatology, given the impact from the global update to JAK inhibitor labels. As we look beyond 2025, we expect combined sales for SKYRIZI and RINVOQ to exceed the peak revenues achieved by HUMIRA, which was more than $21 billion. We expect that to happen in 2027, with continued significant growth anticipated in the following years. Moving now to Slide 7. AbbVie has built a significant leadership position in hematological oncology with Imbruvica and Venclexta. While Imbruvica is expected to generate significant cash flow through the end of this decade, recent challenging market and share dynamics attributed to both the pace of COVID recovery as well as new competitive entrants has significantly lowered our sales expectations for Imbruvica. This expected revenue impact will be partially offset by the continued strong growth from Venclexta, our first-in-class BCL-2 inhibitor for multiple hematological malignancies. Venclexta's approved indications in both CLL and AML are both seeing robust share performance. Potential ongoing label expansion in other important areas such as multiple myeloma and the t(1114) patient population as well as high-risk MDS also have the potential to drive meaningful long-term growth for this business. As a result, the near-term outlook for Imbruvica, we now expect global oncology revenues to decline to approximately $5.7 billion in 2023, and anticipate sales will remain relatively flat for 2024 and 2025. As we look at Slide 8 now, we expect our oncology pipeline to return to sales growth in 2026, with the anticipated launch and indication ramps of several new products for both blood cancer and some solid tumors. These promising late-stage oncology opportunities include epcoritamab, a potentially best-in-class CD3xCD20 bispecific for B-cell malignancies, including DLBCL and follicular lymphoma. The initial approval is anticipated later this year. Navitoclax, a novel BCL-2 BCL-XL inhibitor with a potential to improve symptoms, reverse fibrosis and modify the course of myelofibrosis. We anticipate approval of that asset in 2024. And Teliso-V, our c-Met ADC with the potential to become an important new treatment option for non-squamous, non-small cell lung cancer. We anticipate approval for the initial indication in 2024. As you can see on Slide 9, beyond the late-stage programs that I just outlined, we have a pipeline of early-stage assets that are aimed at both heme and solid tumor. We've begun to see some very exciting data from several solid tumor programs, including our anti-GARP antibody, ABBV-151 and our PTK7 ADC, ABBV-647. We expect proof-of-concept data from roughly a dozen additional early-stage oncology opportunities over the next couple of years. Now moving to Slide 10. In neuroscience, we have compelling therapies for migraine, psychiatric conditions and neurodegeneration. I'll start with migraine, where our distinct therapies are demonstrating robust growth. Our leading portfolio includes Ubrelvy, an oral CGRP treatment for acute migraine that provides rapid and sustained pain relief with convenient dosing. Ubrelvy continues to demonstrate robust growth and has the potential for peak sales in excess of $1 billion. We also have QULIPTA the only oral CGRP treatment specifically developed for the preventative treatment of migraine, potential label expansion in the U.S. as a preventative treatment for patients with chronic migraine and a new therapy approval we expect in Europe will further support QULIPTA's utilization, and we believe that QULIPTA's peak sales can exceed $1 billion as well. Rounding out our migraine portfolio is Botox, a unique treatment with a dozen approved therapeutic indications and is the clear branded leader in chronic migraine prevention. Turning now to Slide 11. In psychiatry, we're focused on treatment options for mood, thought and anxiety disorders. Vraylar continues to demonstrate robust growth in a heavily genericized market. Vraylar is differentiated by a strong benefit risk profile relative to other atypical antipsychotics, including efficacy across multiple indications with minimal impact on weight, lipids and fasting blood glucose. Vraylar was recently approved as an adjunctive treatment for major depressive disorder and is now the only antipsychotic that is a dopamine and serotonin partial agonist approved for the treatment of the most common forms of depression, Bipolar I and MDD. With continued share gains and the MDD approval, we now expect Vraylar's peak sales to approach $5 billion. As you look at Slide 12, we're also making good progress advancing an innovative pipeline of neurodegeneration assets. ABBV-951 is a potentially transformative treatment for patients with advanced Parkinson's disease. With a subcutaneous nonsurgical delivery system, we believe 951 can significantly expand the patient population currently addressed by DUOPA. We anticipate regulatory approval this year and believe 951 has the potential to achieve peak sales in excess of $1 billion. We also have R&D efforts aimed at discovery and developing disease-modifying therapies to treat Alzheimer's. Our pipeline includes an optimized A-beta antibody program for faster amyloid clearance with low ARIA and a patient-friendly dosing schedule, approaches for clearing intracellular tower aggregates and investigational assets that modulate neuroinflammation response. We recently began a Phase II study in AD for a lead A-beta antibody, ABBV-916 and look forward to providing updates on our neuro programs as that data matures. Moving to Slide 13. We're the clear leader in aesthetics, a $14 billion global market, which is largely cash pay. Our portfolio is anchored by well-known brands that span several core areas, including Botox Cosmetic, the market-leading neurotoxin; Juvederm, a leading portfolio of injectable dermal fillers as well as numerous products and technologies for body contouring, plastics, skin care and regenerative medicine. We see substantial room for further market penetration across each of the aesthetic categories, and we've made strategic investments to support that long-term growth. Those efforts include a focus on new product innovation, including a pipeline of innovative toxins as well as novel bio stimulatory and regenerative fillers. Targeted field force expansion in major global markets including China, Japan and Latin America as well as increased direct-to-consumer and enhanced services to drive consumer activation and retention. As a predominantly consumer-facing category, aesthetic treatment procedures can be impacted by changing economic conditions. And while it's difficult to predict how inflation and consumer confidence may play out this year in the U.S., Our large installed base of existing patients as well as the rapid and sustained recovery of our aesthetics portfolio experienced following the 2008, 2009 recession, gives us a tremendous amount of confidence that any near-term economic impact will be transient. Over the long term, aesthetics continues to be an extremely attractive underpenetrated market with significant growth potential, and we remain confident in our ability to achieve total sales of more than $9 billion by 2029. Turning to Slide 14. Our goal with eye care is to help protect and preserve vision. We have a strong commercial foundation with a broad portfolio of treatments for multiple different eye diseases. We also have been advancing several new products and novel therapies to address areas of significant unmet need. This includes RGX-314, which is an anti-VEGF gene therapy that has the potential to be a onetime treatment for wet AMD, diabetic retinopathy and other chronic retinal conditions. Moving now to Slide 15. AbbVie has built a productive innovation-driven R&D organization with a robust pipeline. We set aggressive goals across our discovery and development organizations and we're proud of our ability to develop medicines that have clearly elevated standard of care for patients. AbbVie's R&D efforts continue to demonstrate strong progress with more than 80 clinical and device programs across all stages of development. The breadth and the depth of our pipeline is there to be able to support our long-term growth outlook, and we anticipate numerous important pipeline milestones will occur over the next 2 years. As you can see on this slide, Slide 17, we anticipate the potential approval of roughly a dozen new products or major indications in 2023 and 2024, which will collectively add meaningful revenue growth over the next several years. This includes multiple new product approvals such as epcoritamab, 951, navitoclax and Teliso-V, as well as expanded indications for SKYRIZI, RINVOQ, Venclexta and QULIPTA as well as many others. Over this 2-year time frame, we expect proof-of-concept data from more than 15 early and mid-stage programs. These programs have the potential to drive additional growth for AbbVie over the mid- to latter part of this decade. So in summary, what I'd say is we are obviously executing well across the business. We've assembled an impressive set of diversified assets, and that gives us a tremendous amount of confidence in being able to drive the long-term growth outlook of our company. With that, I'll turn it over to Chris for Q&A. Chris?

Getting folks on stage here. I thought as an opening question, obviously, we were right on the cusp of biosimilar HUMIRA coming to market. So can you maybe share your latest thinking? I know you'll give specific guidance in a few weeks, but latest thinking on how we should think about HUMIRA dynamics as we go through 2023. I think you've talked about the product having 90% of covered lives at parity with biosimilars. I'm just trying to get our hands around how to think about kind of volume and price and just any...

Right. No, it's obviously an important question and an important issue for investors. And let me take a high-level cut at it and then Rob and Jeff certainly can add anything from their perspective. Obviously, one of the most important things was for us to ensure that we could get broad access for HUMIRA. And I'd say the team has done a very nice job. We now have a little over 90% access for next year for HUMIRA at parity. And what that means is, essentially, it will be on formulary with biosimilars, but there won't be any difference between the biosimilar and HUMIRA from a co-pay standpoint or any kind of a step editing. So essentially, it will compete head-to-head against those biosimilars, which is obviously a good position for us to be in. As you look at that and you try to analyze what will the erosion look like. I think the best way to think about the erosion is this. Based on that formulary access, obviously, the 10% that we don't have, we're likely to see fairly significant volume erosion in there. We'll probably see some level of volume erosion in the 90% that we do have coverage, although I would say it's probably going to be much more modest because there's not as much motivation for those physicians to be able to make a change. The second part that you have to think through as you're trying to model the impact on HUMIRA going forward would be price. So the bulk of the impact that we will see in 2023 will be driven by price reductions in order to get that formulary access. Obviously, we had to compete against the biosimilars in order to be able to get that level of access. And because one biosimilar will enter the market at the beginning of this year, but 7 or 8 will enter midyear, what you'll ultimately will see is a certain level of price erosion in the first half of the year and a higher level of price erosion in the second half of the year when the environment was more competitive. So the contracts are structured for the most part in that manner. So you should expect higher level of price erosion in that second half. So that's how I think you can think about 2023. And as you think going forward to 2024, there are a couple of things that you have to sort of factor in. One is that point I just made, and that is because there will be higher erosion in the second half of the year, you have to annualize that erosion going into '24. That's one of the things that's important to do. I think it's likely that we will see more volume erosion in 2024 than we would have seen in 2023 because there'll be more -- all the biosimilars will be on the market. They'll be more accustomed to them at that point. So it will be an even more competitive environment. But as we said before, regardless of the shape of what that erosion curve looks like, our intent is to give you floor earnings within that range. And then the growth of our current business is more than sufficient to be able to offset any incremental erosion in the event we were to see that curve shift out a bit into 2024. Anything you'd add, Rob or Jeff?

I think you fully covered it, Rick.

Jeff, anything?

That's good. I mean, maybe just to add one thing. I mean, over the fall, obviously, we were still in the heart of the negotiations. But to the point that Rick highlighted with the 90%, that's from a parity lives perspective, that's a certainty now. So we've gotten signed agreements with all of the major U.S. payers. And so we feel very good as we go into that fourth quarter call that's upcoming.

Can I talk about -- maybe a question for Rob. Operating margins have kind of hovered in the low 50s over the last couple of years. And I think you've talked in the past about a margin range maybe in the 46%, 47% range as you go through this LOE cycle. So I guess the first question is, are you still comfortable with that range to the extent you can comment on it. And then as we exit this period and growth resumes, how do we think about a normalized margin for AbbVie longer term?

Yes, that's right, Chris. So you think about 46% to 47% would apply in '23. We'd stay at that level in '24. And then as we return to strong revenue growth in '25, we'll start to see operating margins expand once. Now the pace of the expansion will depend on investment needs will obviously fully fund R&D and SG&A to grow the business long term, but you will see us expand operating margin. It will be top tier even at the trough levels, but you should expect to see operating margin expansion starting in '25.

And can I ask a question on capital deployment. I know the company has pretty rapidly paid down the Allergan debt. It seems like you're in a position in '23 that we can maybe think about capital deployment in a more meaningful way. So talk a little bit about how you think about priorities for the organization right now and kind of what's the sweet spot of what AbbVie would be considering in that transaction.